* U.S. debt deal seen stop-gap and this may weigh on economy
* Short-term bill market rallies as default averted
* Long-term bonds firm as business confidence may take a hit
* Fed may also delay plans to reduce stimulus
By Marius Zaharia
LONDON, Oct 17 (Reuters) - U.S. Treasuries rallied in Europeon Thursday after a deal to avoid a U.S. default was seen as astop-gap, sparking long-term growth concerns that could delayFederal Reserve plans to reduce bond-buying stimulus.
A last-minute deal to lift the U.S. debt limit paved the wayfor the U.S. government to re-open after more than two weeks,but it only secured funding until Jan. 15, raising thelikelihood of another round of political brinkmanship.
The fact the agreement left unresolved fundamental issues ofspending and deficits brought only short-term relief and raisedlong-term worries that the debt ceiling would become astructural drag on the economy.
This in turn was likely also to delay plans by the FederalReserve to trim its vast bond purchase programme, giving anextra boost to Treasuries, analysts said.
With the risk of a near-term historic default averted,October T-bill yields fell by more than two thirdsto 0.21 percent.
The impact on investor appetite for risky assets, however,was limited and longer-dated paper, seen as a safe-haven evenduring the budget deadlock, also rallied. Ten-year U.S. T-noteyields fell 5 bps to 2.62 percent, while T-notefutures rose 12/32 to 126-41/64.
"The nature of the deal disappointed because we're going tosee this game happening all over again next year," Rabobankstrategist Philip Marey said. "It casts dark clouds over theeconomy - politics are now the main drag for growth in the U.S."
Expressing similar concerns, Chinese rating agency Dagongdowngraded the United States to A- from A and maintained anegative outlook on the rating. Its ratings are hardly followedoutside China and the change did not move markets.
The deal is likely to release a flood of economic data thathas been delayed by the government shutdown.
"It's back to fundamentals now," Investec chief economistPhilip Shaw said.
"First, there's been a slowdown in the economy in the fourthquarter; second, the pause in economic data during thegovernment shutdown failed to give a more complete picture ofwhat's going on; and third, it's possible that we go throughthis once again in January."
While most T-bill yields retreated, those of bills maturingin February remained near their highest levelssince they were issued. They were last quoted at 0.10 percent,having hit a high of 0.14 percent on Wednesday.
"Over the course of January we're going to see the samething happening to bills maturing around that date that we'veseen with October T-bills," Rabobank's Marey said.
- Budget, Tax & Economy